05 August 2010

By using fundamental analysis, one can figure out the intrinsic value of a company according to its (1) financial statement and (2) business perspective.

Fundamental Analysis in Financial statement:
There are three very important sections whichthat investor needsneed to lookaroundfor in financial statement or financial report, that are, (1) balance sheet, (2) income statement and (3) cash flow statement.

1. Balance sheet in a financial report tells the financial portfolio of a company. Three components can be found in balance sheet, that are, total assets, total liabilities and total equity. Therefore, from the balance sheet, value investors can figure out whether this company is using lots of debt to expand their business and boost their income or has ability to improve their financial condition in such a way thatto reduce the risk of bankruptcy or other.2. Next, from the income statement, the profit margin of a company can be calculated.whichIt is useful to determine whether it isthe company has a "monopoly" business, traditional business, or competitive business. Normally, a "monopoly" business will have a relatively high profit margin compared to competitive business. Besides, investors also can also compare a company profit margin regardingagainst the change, such as change of raw material prices, in such a way that to have a better understand about which factors that will affect the profit of the company. Next, earning per share (EPS), another very important figure in income statement, shows how much is earned by this company inwith one share.

3. Last but not least, cash flow statement can be used to reveal how a company used their money and whether a company has ability to convert their product or investment into money. As a rule of thumb, if a cash flow statement is not comprehensive, please find another company which is more willing to reveal to their shareholders how the company used their money to their shareholders.

Next post I am going to introduce how a balance sheet work. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.

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